All You Need To Know Before Investing in Ethereum.

What is Ethereum?

Ethereum is a decentralized blockchain platform, fueled by its unique cryptocurrency (Ether). This platform enables users to seamlessly form agreements, and directly exchange digital assets. Beyond this, Ethereum offers the potential for interest accumulation through staking, cryptocurrency trading, gaming, and the utilization and storage of Non-Fungible Tokens (NFTs). Not limited to a mere blockchain, Ethereum encompasses a computing network and programming language that empowers the development of blockchain-based applications.

In this article, you will:

1. Gain a thorough understanding of what ethereum is and its origin.

2. Understand the benefits and the risks associated with the network.

3. Understand its role as an investment tool.

Use Cases of Ethereum.

Figure 1 below shows the various use cases of Ethereum, including as a means of payment, digital identity, DeFi, etc.

Before we begin:

At its inception in 2013, ethereum had eight founding members, led by Vitalik Buterin as the visionary who remains deeply engaged in its development. Buterin's vision was to create a digital platform that could address a broad range of financial issues. This catalyzed the collaboration of other bright minds, including Gavin Wood, Charles Hoskinson, Amir Chetrit, Anthony Di Iorio, Jeffrey Wilcke, Joseph Lubin, and Mihai Alisie.

Growth and development of Ethereum.

Ethereum gained significant attention in early 2014 when its founders initiated a crowdsourcing campaign to sell Ether tokens. This injection of funds fueled the expansion of their vision, enabling the sale of millions of dollars' worth of ETH for project development. Although ETH coins became available for purchase in 2014, the first Blockchain release, known as Frontier, wasn't introduced until July 2015. Subsequently, the platform experienced remarkable growth.

The fundamental distinction between Ethereum and other popular crypto currencies like Bitcoin lies in Ethereum's ability to facilitate more than cryptocurrency trading. Ethereum's objective is to leverage blockchain technology for a decentralized payment network and code storage. While Bitcoin aims to be an alternative to traditional currencies, serving as both a medium of exchange and a store of value, Ethereum's goal is to enable programmable, immutable contracts and applications through a global virtual machine.

Additionally, Ethereum introduces the concept of smart contracts.* Smart contracts are essentially coded agreements between parties, functioning on the Ethereum blockchain and capitalizing on its strengths of transparency, security, and efficiency. Their digital nature facilitates automatic execution in six straightforward steps:

1} Agreement on Terms and Conditions.

2} Creation of the Smart Contract.

3} Deployment of the Smart Contract.

4} Fulfillment of Triggering Conditions.

5} Execution of the Smart Contract.

6} Recording of Contract Outcome on the Blockchain.

Benefits of Ethereum.

Figure 2 below shows five benefits of Ethereum, which are flexibility, ecosystem, community support, Interoperability, and decentralisation (FECID)

Some risks associated with Ethereum and the Ether Network

Similar to any blockchain, Ethereum carries its own set of risks that can't be ignored. When considering investing in Ether (Ethereum’s native cryptocurrency) it's important to acknowledge five (5) notable risks:

Competition from Emerging Players:

Despite Ethereum's position as the leading DApps* platform, the field is witnessing a surge in competitors. Some newcomers excel in critical aspects like security and decentralization. This introduces the potential for Ethereum's market share to dwindle over time, which might manifest as ETH underperforming in comparison to the broader market. This risk necessitates careful consideration by prospective Ethereum investors.

Vulnerability to Hacking:

Cryptocurrencies are susceptible to malicious attacks, and Ethereum has experienced its share of such incidents. For instance, in 2016, Ethereum encountered a hack resulting in a $70 million loss for the Ethereum DAO. While the community orchestrated a hard fork* to restore the funds, more recent instances such as a 7-block reorganization of the Ethereum blockchain underscore the risks inherent in the ecosystem. While these incidents don't significantly impact ETH's price, they highlight important considerations for both Ethereum and cryptocurrency investors at large.

Possibility of Cryptocurrency Inflation:

Concerns regarding crypto inflation arise from the absence of a lifetime cap on the potential number of Ethereum coins. Despite its annual release limit of 18 million Ether, Ethereum's investment potential may resemble that of traditional currencies, such as dollars, and may not experience the same level of appreciation as Bitcoin. The latter maintains a strict lifetime limit on its coin supply, differentiating it from Ethereum in terms of potential value growth.

Network Congestion and Competition:

Ethereum is currently facing tough competition from various blockchain platforms that provide unique features and scalable solutions. Platforms such as Solana, Polkadot, and Binance Smart Chain have gained significant popularity by effectively addressing Ethereum's scalability challenges. The occurrence of network congestion during periods of high demand can result in delays and increased transaction fees. These factors can be discouraging for both users and developers alike.

Challenges in Governance and Regulation:

Ethereum encounters challenges in both governance and regulation, which can impact its development and adoption. Governance challenges arise from the evolving nature of Ethereum's governance model. Decisions related to network upgrades and changes often involve differing opinions among stakeholders and disagreements could occur. These disagreements have the potential to slow down decision-making processes and influence the platform's development trajectory entirely.

In addition to governance challenges, Ethereum faces regulatory scrutiny from governments and financial authorities globally and this is due to the increasing popularity and impact of Ethereum which has brought it under the regulatory spotlight. However, the regulatory landscape surrounding cryptocurrency remains uncertain and can present hurdles for Ethereum-based projects.

Ethereum as a medium of investment:

Amongst people newly introduced to Ethereum, there could be some form of confusion between Ether and Ethereum in respect to investment. Ethereum is the blockchain network where Ether can be kept and exchanged and Ether is the native digital currency of the Ethereum network. You invest in Ethereum, but the reason that is possible is because you purchase Ether tokens.

Aside from shipping, digital identity, and data storage, Ethereum can also be seen as a form of investment via Ether and this is because it's a decentralized blockchain platform which enables the creation and execution of smart contracts, providing a foundation for various decentralized applications (DApps) and decentralized finance (DeFi) protocols, which have the potential for significant growth and adoption.

In addition to that, Ethereum's native cryptocurrency, Ether (ETH), serves as the fuel for the network and can be bought and held as a speculative investment with the expectation that its value will appreciate over time based on factors such as increased adoption, utility, and market demand.

The essay below discusses the various types of investments:

Buying and Holding through a Crypto exchange: There are several ways to buy ETH, such as with Ethereum ATM, cash, credit card, PayPal, and through a crypto exchange. However, the simplest way is via a crypto exchange.

For this, the first step is to find a crypto exchange catering to your region, register, and ensure its validity. After registering, decide on any deposit method of your choice then place an ethereum order by linking your debit card/bank account. Once funds are in your exchange account, you can begin trading USD for Ether. For small holdings, it is simpler to leave them in your exchange account, and for added security, do consider using a digital wallet.

Buying through a brokerage app:

This is similar to using an exchange and is also one of the simplest ways to invest in Ethereum as it typically takes only a few minutes to get through. While there are several broker exchanges, only a few of them are considered reliable, and they include Coinbase, Robinhood, and Coin Mama. If you'd like to buy and hold ETH without any inconvenience, then this could be the best choice. A brokerage app can easily be downloaded on your device, after which you sign up to create an account and confirm your identity on the app chosen. Funds can thereafter be deposited into your account, then you proceed to purchase your ETH. After this is done, you can send your ETH to your Ether Wallet from your broker exchange app by using the designated wallet address.

It's important to note that not all apps allow you withdraw your ETH, so depending on the app you settle for, you might not be able to move your ETH to a personal wallet or another broker exchange. That in fact, is a major con of this investment type because they offer less features than exchanges thereby limiting what you can do with your ETH.

Peer-to-peer Exchanges:

This is a very private alternative as it allows for you to buy Ethereum anonymously without the involvement of a crypto exchange or a brokerage app. Here, you can buy ETH from an individual directly. Because of the risk attached to this procedure, it's advisable to only deal with trusted persons, and to also wait for the 12 blockchain confirmations* after the exchange must have taken place. During this process, bear in mind that blockchain transactions are not reversible, hence the need to ensure that your address is correct before you proceed with the transaction. For the sake of caution, you could opt for a test transaction to confirm if everything is working perfectly. Some of the best P2P platforms include OpenPeer, Binance, and LocalCoinSwap.

ETH Lending: ETH lending is one of the various ways to earn from your ETH. It is simply the process of making your ETH available for others to borrow while you earn a yield on it. Lending ETH is one of the best ways to earn passive income while still holding on to your tokens. When people borrow your ETH, the interest they pay is what makes up your yield in return. The initial interest earned can also earn more interest, thereby compounding your return.

Ethereum loans employ the peer-to-peer system where they connect borrowers and lenders for their self-interests and the simplest way to go about it is to use lending platforms; either centralized or decentralized like Arch, Nexo, Compound, or CoinRabbit. These platforms often have fixed lending rates so it's important to know the rate of the platform you choose. The interest a borrower earns when he lends his Ether tokens is known as the Annual Percentage Yield (APY)

Other ways to invest in Ethereum are through Exchange-traded funds and mining your own ETH.

In summary, Ethereum stands as the second-largest blockchain technology. According to cryptocurrency experts, it holds a superior investment potential compared to other cryptocurrencies. Many individuals have found investing in Ethereum to be a wise choice. However, it's important to note that no investment is entirely risk-free, and this applies to Ethereum as well. Nevertheless, Ethereum is widely regarded as a secure option. As the network continues to expand, its security will only strengthen, making it more resistant to potential attacks.

Ethereum's future prospects are promising. The platform is just beginning to tap into its potential with the increasing popularity of DeFi, applications, and smart contracts. For those considering investment, the current timing appears favorable. Nevertheless, a comprehensive understanding of cryptocurrency is of paramount importance before venturing into the market.

INDEX:

Decentralized Applications (DApps): They are digital software applications or programs that run on a blockchain system.

Smart Contracts: Smart contracts are computer programs that work on the Ethereum blockchain and leverage its benefits including transparency, security and efficiency. Smart contract uses code and is an agreement between two parties. The digital nature associated with smart contracts make it easier for them to be executed automatically in six easy steps:

Hardfork: Hardfork refers to an extreme change in a specific network’s existing protocol that allows previously valid transactions and blocks invalid, and vice versa.

12 blockchain confirmations: A transaction is said to be confirmed once it has been added in a block and subsequently, that block has been included to the ethereum network. So generally, it's advised to wait for at least 12 confirmations to guarantee the security and success of the transaction.